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10 Jul What Oil and Gas Boards are Asking about Digital

Boards of companies in the oil and gas sector are suddenly finding themselves in the digital debate and are informing themselves through questions about digital. Here’s the questions.

Which Boards?

Frankly, Boards of all companies participating in the oil and gas sector. That includes upstream explorers and producers in conventional, unconventional and offshore, the midstream participants such as pipelines and tank operations, the downstream operators in retail, wholesale and distribution, and suppliers to the industry.

Requests for some novel digital funding are no doubt making their way to Boards for approval. Or companies have been quietly hit with some ransomware cyber attack. Or a Board member sitting on a financial services company may be wondering why they’re not seeing the same level of interest in digital from the resources sector. Or there are some early digital results that have fallen short or wildly exceeded expectations, which triggers some introspection.

Is digital for real?

Yes, it’s absolutely real. The technologies that comprise digital (cloud computing, sensors, artificial intelligence, machine learning, wireless networks, smart devices, etc) are all evolving in ways that follow Moore’s Law (a halving of cost and a doubling of capability every year). These technologies are now widely available to any industry, not just the technology sector in Silicon Valley.

The Valley has also started to understand how to configure businesses and business models so that they can scale up very rapidly by making adoption cycles much shorter. A smart phone in every pocket is a start, but couple that to a user interface so easy to use it requires no training, distribute it through an App Store to ease global distribution, access it through cloud computing so that it’s available everywhere, make it more like a game so that it’s mildly addictive, fund it using venture capital, promote it though social media.

Will digital come to oil and gas?

Some skeptics on boards will say “this can’t happen in oil and gas”. Too regulated, too fragmented, too business to business. Operations are 24/7 and can’t be taken off line except in turn arounds or emergencies. Shareholder returns are still best served by exploiting the traditional investments of the sector.

That’s not a bet that I’m prepared to make any longer. Here’s a few real examples of digital impacts, drawn from a workshop that I attended on the impacts of digital on energy, organised by the IEA in Paris:

A global upstream player placed some of their subsurface data in the cloud and invited mathematicians, statisticians and data scientists to see if they could interpret the data. Turns out this crowd of non-experts (that is, their expertise is not from traditional subsurface disciplines), was able to match the performance of the in-house experts.

A global equipment company (think pumps, controllers, SCADA) projects a 30% improvement in asset utilisation by applying digital techniques to the installed base of gear. That’s a huge productivity gain.

A global upstream player forecasts that new digital technologies (machine learning, analytics) will unlock a further 450b BoE valued at $22T from known conventional and unconventional resources by improving recovery rates. That’s a lot of value at stake.

Another global equipment company forecasts that almost all oil and gas equipment will achieve greater than 90% availability by eliminating unplanned downtime through digital. Across a large enough business, that’s like finding another big plant hidden among the others.

A demand side management company in California, leveraging data from energy consumers, helps power suppliers capture negawatts (energy not consumed), through clever analytics that draw on consumer data, and in return send targeted behaviour signals to the consumers.

A global power company forecasts that new digital technologies embedded in industrial equipment (gen sets, pumps, turbines) will yield between 7-15% reduction in energy demand.

Frankly, digital is already in oil and gas. If employees have smart phones (and it’s a good bet they do), then they’re digital. All the newest kit coming to the industry is, or will be, progressively more digital.

The big problem is what to do with all the legacy, brownfield kit that was never designed for a digital world, where there are no wireless networks, where the equipment is manual and mechanical, where even SCADA has yet to penetrate.

Will digital impact different companies differently?

Yes, absolutely. The impacts of digital are not uniform and not symmetrical across industry. Some companies stand to gain more than others. Here’s a few rules of thumb:

For fast cycle capital, digital enables growth. An unconventional upstream player, who drills $5m shale wells, is ideally positioned to apply digital techniques to the well delivery life cycle and transfer lessons and benefits to subsequent wells. I would expect those companies to disproportionately benefit from digital.

For long life capital, digital enables survival. Once the capital is spent, particularly on plant and equipment, that capital needs to hit high availability targets, run at high utilisation, deliver high throughput and produce on spec output. Equipment providers foresee digital improving all of these critical performance curves in dramatic fashion. Converting kit to be more digitally enabled or installing only the latest digitally smart kit will be key.

For equipment providers, digital is becoming table stakes. Some equipment makers will see digital as offering a competitive advantage and will convert their offerings to be more digital (see GE as a case example).

For the commercial functions, digital impacts are going to be more even. One digital technology, robotic process automation, can take a lot of the drudgery from existing work practices by automating key strokes. Blockchain technology will overhaul trading, land transactions, supply chains. 3D printing will open up new ways to think about the supply chain to make certain parts at site.

And these are today’s examples. No matter the company or its position in the market, it faces a confusing, confounding and complex digital world. It will need a strategy to address how to embrace digital.

What do we stand to gain by investing now?

Boards might contemplate taking a wait-and-see view of digital, and that may well be appropriate given a company’s circumstances. However, there are clear benefits to investing a little in digital today.

First is to capture the benefits from some digital developments that have been de-risked. A good example is cloud computing. The cloud sector is now led by a few very large organisations (Amazon, Google, Microsoft), and most new software will be built for the cloud.

Second is to position for the future. A good approach is to work with the ecosystem of digital technology accelerators (the majority of which know little about oil and gas) and run little pilots and proofs of concept to see what the benefits are likely to be.

Third is to build talent and capability. A good area to explore is in the realm of data science. One oil and gas company in Australia has established a data science team to capture more value from data (check out their YouTube video on their advancements).

Fourth is to strengthen communities. A good development zone will be in blockchain. Oil and gas has already completed some pilot projects in crude oil transactions, and a number of companies are already forming working groupsto drive new pilots with more participants.

What bad things will happen if we stand pat?

Most Boards want to know what the downside risk is of any investment, including digital. It’s a prudent question when you’re responsible for shareholder’s money.

Compromised market position.

Stock market analysts are starting to ask companies to sketch out how they are responding to the digital wave, and what investments are being made. They will be comparing companies to each other and gauging competitive position. Discounts will be applied to companies that are harvesting and not investing in the digital future.

Poor talent experience.

Employees in oil and gas have been schooled in the discipline of the market through the downturn. They know they are dispensable, and will be looking to future proof their own careers. Employers that block digital from their companies are therefore laying the groundwork for talent flight.

Talent will have many new options. My Uber driver last week was a software testing specialist looking for his next career. I didn’t direct him to any oil and gas concern, but instead suggested he check in with the many technology incubators now in Calgary (Rocketspace, Zone Startups, District Ventures, Alberta Innovates, ATB X, Innovate Calgary), start a testing service or sign on with one of the digital start ups.

How should we get started?

With all the uncertainty, the hype, the outrageous successes, and the unrelenting sales calls, what should a company do, and by extension, what should the Board be looking for?

A digital strategy

With digital innovations impacting all parts of the economy at the same time, in unequal measure, Boards should be asking management for their digital strategy. It should give considerable thought to the company’s economic position, how it stacks up to peers, and how the company will close performance gaps or capture real tangible growth benefits from digital investments.

Too many so-called “strategies” are just laundry lists of technologies and where they can be applied in the industry.

An investment portfolio

Boards are responsible for approving the allocation of company capital towards investment possibilities. Management should be offering up a constantly evolving digital investment portfolio with a range of initiatives in various stages of development. There should be clarity as to which are driving improved operations, which are enabling growth, and which are innovations to the business.

An ecosystem of help

Despite all the advantages of incumbency (scale, brand, relationships, experience), it’s the small start ups that have the upper hand in embracing digital. They have fewer constraints, faster decision making, lower initial approval hurdles, and creative talent. Boards should look to how oil and gas companies are embracing and working with the ecosystem of start ups, incubators and accelerators.

Change management

The biggest challenge for large players in oil and gas is their ability to adopt change. The sector is very change resistant (and rightfully so – hastily introduced changes are dangerous), and therefore needs special attention to how it will adopt the changes made possible by digital.